The basic idea
With a normal loan (hire purchase in the UK), your monthly payments pay off the whole amount. With balloon finance, part of the price is set aside as a final payment, often based on what the car should be worth at the end. You only pay down the rest each month, so payments are lower. At the end you pay the balloon, refinance it, or, on UK PCP and Japanese residual-value loans, hand the car back.
A worked example
A £30,000 car with a £3,000 deposit, financed for 48 months at 8.9% APR:
| Hire purchase | PCP with £12,000 final payment | |
|---|---|---|
| Monthly payment | £666.22 | £455.69 |
| Final payment | none | £12,000 |
| Total repaid | £31,979 | £33,873 |
| Interest | £4,979 | £6,873 |
The PCP payment is about £210 a month lower, but if you keep the car and pay the final payment, it costs about £1,894 more in interest. You pay interest on the £12,000 balloon for the whole four years, because you never pay it down.
When balloon finance makes sense
- You plan to change cars every few years and expect to hand the car back or part-exchange it.
- You can afford the final payment, or the car’s guaranteed value covers it.
- You stay within the mileage limit and keep the car in good condition, so there are no charges at the end.
The risks
- Higher total cost if you keep the car, as the example shows.
- Negative equity: the balance stays high until the end, so for most of the loan you owe more than the car is worth. See the negative equity calculator.
- Mileage and damage charges if you hand the car back.
UK only: voluntary termination
On UK PCP and hire purchase, you can end the agreement and return the car once you have paid half the total amount payable (Consumer Credit Act s.99). In the example, the total amount payable including the deposit is £36,873, so the halfway point is £18,436.49, which you reach after about 34 payments. The negative equity calculator shows how far you are from it.
Work out your own deal
Enter the final payment in the “final payment” box of the APR calculator. It shows the monthly payment and the APR with the balloon included.
Try it yourself
Open the UK car finance calculator and enter your own loan. It works in 13 currencies and follows each country’s loan rules.